Revision Lecture: Microeconomic Reform (MER)

A guide to the implementation of MER policies in Australia.

Lecture OverviewDefinitionToolsRecent Case StudiesStrengths Weaknesses

Definition “…any government policy action

encouraging a firm or industry to participate in structural reform….”

“Reforms act on specific parts or aspects of our economy.”

“…a wide range of supply-side efficiency measures designed to improve…particular industries…”

DefinitionThe main points of all of the definitions

lead to the same key facts: Our aim is on the supply side We focus on one particular part of the

economy Many tools are available to assist

Tools Deregulation Privatisation Corporatisation Tariff Reform Labour Market

Reform Competition Policy Supervisory Bodies

DeregulationThis is the process of removing

government “red tape”.That is, bureaucratic barriers to entry in

a particular market. Industries are deregulated to encourage

participation, increase competition and force efficiency.

Deregulation - 1 In October 1990 the airline industry was

deregulated.The main change was to relax barriers

to entry in the domestic passenger carrying market.

By September 1994 prices had fallen by just over 23% in real terms.

Deregulation - 2 In 1993 the long distance telephone

market was deregulated in Australia. In under a year, the results included just

one new carrier (Optus), however already prices had fallen by 20%.

Deregulation - 3 In mid 1989 the

NSW government deregulated the market for eggs.

Almost immediately prices fell by 17%.

PrivatisationThis is the sale of assets which are

publicly owned into the hands of private investors.

Once again, the goal is to improve the efficiency of the firms by forcing them to be answerable to shareholders.

Privatisation - 1 In the early 1990’s shares in all 400 of Poland’s

GBEs were placed in the hands of a giant firm. Ownership of this firm was given to the entire

adult population. The results were immediate:

Inflation fell from 600% in 1993 to 30% the next year Real GDP fell in 1989 and 1990 (over 20%!), by

1992 it was growing again Unemployment, however, climbed to 17%

Privatisation - 2The CBA was sold off in two stages, in

1991 and 1996.Since then the share price has

multiplied ten-fold, and the dividends have continued to rise.

Privatisation - 3Telstra was privatised in 1996 and

1997.Since then they have gone from 76,990

employees to only 44,977Their market share has dropped from

90% to 70%However, the profit per employee has

increase from $21,041 to $81,375

CorporatisationThis is the process of forcing GBEs to

face the same market as other businesses.

That is, they must aim to make a profit just as if they were owned by shareholders.

Also, they do not receive special loans or other government benefits.

Corporatisation - 1The best example of this process is

Australia Post.Up until November 1993, regulations

prohibited anyone from carrying a letter for less than $4.50.

At that time the price was dropped to $1.80, and letters over 250g could be carried by anyone at any price.

Corporatisation - 1 The results? In August

1994 Australia Post announced that the price of a standard letter would be fixed at 45c.

It remained there until 2002 – a fall in price of around 30% in real terms.

At the same time profits paid to the Govt have increased by 120%!

Tariff ReformTariff reform was on the agenda as

early as 1973, but by 1988 it was a major government focus.

Although the goals are repeatedly put back, the main focus is to eventually eliminate tariffs by 2010 as per our APEC agreement.

Tariff ReformThe major exceptions to these reforms

have been the motor vehicle industry and the TCF industry.

These areas maintain high protection, although they will not be able to rely on this forever….

Tariff Reform In 1998/9 industry assistance was

estimated to be costing Australian consumers $9 billion per year.

By 2010 these costs should be gone.The real question is, at what cost…? (See earlier PowerPoint for more

detailed discussion of this area.)

Labour Market Reform In the early 1990’s Australia’s labour

market moved towards enterprise bargaining.

By 1996 this was enshrined in the Workplace Relations Act.

The main attempt was to make wage negotiations decentralised, to lower the influence of the unions.

Labour Market Reform At this stage it is

difficult to judge the impact of this policy with official statistics.

There are still many critics of the process.

Labour Market Reform - Pros Decentralised negotiations are more flexible. Working towards agreement leads to

cooperation, and therefore fewer strikes. Efficiency is vital for achieving

macroeconomic goals. Overseas markets have all gone in a similar

direction. Workers and managers are held accountable

for their actions.

Labour Market Reform - Cons Our trading partners have even more flexible

arrangements – do our reforms go far enough?

Only 35% of people have taken up the chance to negotiate.

Minimum wages are still used. Better negotiators get better pay, which leads

to inequality. How can the average worker measure their

own productivity objectively?

Competition PolicyThe Hilmer Report in 1993 suggested

that the Australian economy would benefit from a higher degree of competition.

Accordingly in 1995 National Competition Policy was adopted by all Australian states.

Competition PolicyAt the time, it was estimated that this

one change would add 5% to Australia’s GDP.

The federal government agreed to reward the state governments with $16 billion in grants for successful implementation of the legislation.

The goals of the new laws were….

Competition Policy1. Review anti-competitive legislation (eg

licensing arrangements, shop hours etc).2. Allow private firms to compete with

GBEs.3. Allow for access to GBE infrastructure.4. Reform all providers of infrastructure

and utilities.

Supervisory Bodies With ongoing

deregulation, certain industries were seen to need supervision.

This is because if an important utility or infrastructure provider “goes under” it affects all parts of the economy.

Supervisory BodiesThe most obvious examples are APRA

and ASIC.These two groups oversee the health of

our financial sector.With the phasing out of PAR

requirements, it became important that these institutions understood their importance.

Strengths of MER When examining the

strengths and weaknesses of any policy, it is important to be able to relate the policy to the goals of the government.

Strengths of MERDomestic strengths:

Cost inflation has been minimised (demand inflation has been held in check by macro policies)

Economic growth has been maintained, despite uncertain global conditions

Unemployment, overall, has continued to fall DESPITE the use of MERs

Strengths of MERExternal strengths:

Labour market reforms have allowed for our wages to grow at a slower rate than those of our trading partners

Structural changes in the transport industry have allowed for more efficient exporting

Telecommunication reforms have cut costs Financial deregulation has allowed for

cheaper borrowing

Strengths of MERAnd more…

National savings have been encouraged, lowering our reliance on overseas borrowing

Tariff cuts and new programs have lowered costs of production for domestic firms (particularly exporting firms!)

Weaknesses of MERDomestic weaknesses:

Long term unemployment has increased, due in part to structural unemployment (eg the public sector lost 135,000 staff members between 1995 and 1998)

Like all policies, the “ideal goals” or MER are hampered by political constraints, time lags and conflict with other goals

Weaknesses of MERExternal weaknesses:

Lower tariffs can lead to a worsening of the CAD (ie local production is discouraged, importing is encouraged)

Improved productivity can be undone by overseas policies (eg the assistance given to farmers in the USA)